What If AT&T's T-Mobile Buyout Gets Shot Down by Regulators?

The media is full of reports that U.S. regulators have begun to take a long, hard look at whether the AT&T (T) deal to buy T-Mobile from parent Deutsche Telekom (DTE) will create a quasi-monopoly in the American cellular carrier industry. The Justice Department has broadened its investigation into the potential transaction.

Most of the analysis of the proposed buyout has focused on the expense reduction and subscriber price leverage AT&T would gain through the deal. But the telecommunications giant has more profound motivations to make the acquisition. Its residential land-line business is dying as people switch to the use of cellular phones and VOiP, and AT&T's own foray into broadband-to-the-home puts it in direct competition with already-entrenched cable companies.

Observers note that the AT&T buyout of T-Mobile would give the larger company more wireless spectrum, but it's not clear whether this would help it solve its cellular traffic problems. AT&T's 3G network has been clogged with data ever since it began to market the Apple (AAPL) iPhone.

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It has begun efforts to roll out a national 4G network to compete with Verizon Wireless and Sprint-Nextel (S). The Federal Communications Commission investigation of the $39 billion transaction has focused on, among other things, AT&T's ability to hog wireless frequencies, which are in short supply.

AT&T's earnings reports tell the story of a company which has just one division showing strong growth: cellular. The company's legacy business of providing home telephone service is in a period of attrition. In its 10-K filing with the SEC, AT&T states: "Revenues from our traditional voice services have been declining as customers have been switching to wireless, cable and other Internet-based providers." Wire-line voice service was 30% of the firm's revenue in 2008. In 2010, it was down to 23%.

Meanwhile, the AT&T U-verse fiber-to-the-home effort has nearly stalled. It added only 218,000 net subscribers in the first quarter to reach a total of 3.2 million. That leaves it a long way from catching cable leaders like Comcast (CMCSA) and Time Warner Cable (TWC)

At this point, cellular subscription sales in the U.S. are close to a zero-sum game. The number of people with wireless plans has leveled off in recent years, and if AT&T hopes to maintain rapid growth in this sector, it will have to take customers from its rivals. A buyout of T-Mobile would push it into a strong first place in cell phones, and it's going to need that No.1 spot: Its other core businesses have faltered.